How is Tennis Like Trading?

Like many children, I grew up playing sports. My summer was filled with time split between swimming, tennis and soccer. Then as fall began to turn into winter, my two brothers and I would begin construction of our hockey rink in our side yard. For years, my parents encouraged us to play as many sports as possible. As we got older, we narrowed our sports to one sport a season, as the travel teams and practice commitments grew.

As a child and teenager, I had no idea of the time commitment my parents made to support our various sports teams. For example, there was one winter where my two brothers and I were on three hockey teams … EACH. That meant virtually every morning there was 6 a.m. ice time, and almost certainly 8 p.m. games. The weekends were even tougher, as one of us would travel to Chicago to play a tournament, and another to the upper peninsula of Michigan.

Now I have children of my own, and as they get into more and more sports, I recognize the sacrifices my parents made. I coach my daughter’s tennis and soccer teams, and my son’s soccer team—a total of four days a week of commitments. While I wish I could sip coffee in my comfortable chair on Saturday mornings, watching the games and idly messing with my phone, I know how important a good coach and sports are to a kid’s development. The lessons learned on the sports fields about winning and losing are lessons I still use in trading today.

I retired from my hockey and soccer “careers,” but not before I met my wife on a co-ed soccer team in Chicago many years ago. Once we began to have kids, I decided not to risk a torn ACL or damaged Achilles in my hectic life. That said, I still play competitive tennis, and on occasion I still travel for tournaments.

Playing a competitive tennis match or tournament is a great deal like trading and investing these days. Going into a match, I rarely know the player, his style of play, or how I will approach the match. Similarly, these days in the market, every day is totally new, filled with unexpected swings. But as in tennis, in trading/investing you hit your best shots and put on your highest conviction trades—and over time, you will win out.

Buy-Write: Buy Ascena Retail Group (ASNA) Stock and Sell October 14 Calls for a net price of $13.40 or better.

To execute this trade, you need to: Buy ASNA Stock, and Sell to Open the October 14 Calls.

As always, you can sell one call for every 100 shares you purchase, or five calls for every 500 shares you purchase.

For example, you could buy the stock at 13.95, and sell the October 14 Calls for 0.55.

If ASNA closes at 14 or above on October expiration, or a week and a half from today, we will have created a quick yield of 4.4%.

If ASNA is unchanged on October expiration, we will have created a yield of 4.10%.

Our breakeven on this position is 13.40.

After each trade alert, I send a follow-up email going into much greater detail on the reasoning behind each trade.

Here’s an excerpt from the follow-up email:

This morning, we initiated a buy-write in ASNA. When I looked at the price of the volatility/price of options compared to the past two years, I found that volatility is at a two-year high.

Here’s the graph of ASNA option volatility:

What’s so interesting about this graph is that this current volatility exceeds the volatility for earnings that were recently reported—by a significant amount. It certainly feels like something is coming in the next week. I researched and reached out to my associates in the trading world, but was unable to find a potential catalyst.

I fully expect some sort of news to come in the next week and a half because the call buying and option volatility is telling me so.

After the close of trade the next day, private equity firm Golden Gate Capital disclosed that it owned a 9% stake in ASNA, and that the firm had initiated talks with the company’s management.

When I saw the news, I was thrilled! My order flow reading had struck gold as the stock was indicated one dollar higher in pre-market trade on Friday morning. Then, as the market opened, ASNA started to drift lower, and later finished the day down by $0.60 on the day. Needless to say, my thrill was gone.

However, as I step back from this trade, which is still in decent shape, though not yet a full profit success, I’m more OK with how it played out. As in tennis or any sport, I read the game/option action perfectly, and took my best swing/trade. However, in the end, the trade turned out to be a swing and a miss. Over time though, I know that if I continue to stay within my game, both on the tennis court and in trading, I’ll hit more aces than double faults.

P.S. At Cabot Options Trader, I offer a complete options education, and only recommend trades in which the odds are clearly in our favor. When I buy options, I risk pennies to make dollars. When I sell options, I never expose my subscribers to any catastrophic risks. Sometimes I go for singles; other times I’ll try to hit home runs. My options trading strategies are varied enough to cater to all investors depending on their investment objectives, risk tolerance and available assets.

With a little education, options trading can be simple, low-risk, fun and most importantly, profitable.

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Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

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Market Update

From Cabot Small-Cap Confidential:

The S&P 600 Small Cap Index is up in 20 of the last 24 days.

The stock market has been having quite the party over the past month. Since November 8, the date of the election, the S&P 500 is up by 4.8%. Small caps have crushed that performance, rising by almost 16% over the same timeframe. Much of that outperformance can likely be attributed to a more favorable relative valuation (as compared to large cap) heading into the election. And an even better outlook coming out, given what is expected to be a pro-growth administration. Given the outlook for a pro-USA administration as well, which favors small caps over large (given their 19% ex-U.S. revenue exposure vs. roughly 30% ex-U.S. for S&P 500), we essentially wound up with a pro-small cap-squared backdrop. Everything has been working.

Alert

Many top earnings winners pulled back during the two-day Brexit selloff. I want to initiate a bullish position in Applied Materials which stood out after
blowing away earnings estimates. While I like the stock, I believe that there may be limited upside in most stocks, so I want to initiate a buy-write,
which sells expensive options.

To execute this trade, you need to:
Buy AMAT Stock,
Sell to Open the August 23 Calls.

As is always the case, you can sell one call for every 100 shares of stock you buy. Or five calls for every 500 shares you purchase.

For example, you could buy AMAT stock at 23 and sell August 23 Calls for 1.00 (the math behind this net price is 23 minus 1 equals 22).
I expect you will get a better price than I'm recommending.

The most you can make on this trade is $1.00, a yield of 4.54% in just over a month if AMAT closes above 23 on August expiration.

If AMAT is unchanged on August expiration, we will have created a yield of 4.54%.

Breakeven on this trade is 22.

The most you can lose on this trade is $2200 per buy-write if AMAT were to go to zero.

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